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Nuclear Power: a Hedge against Uncertain Gas and Carbon Prices?

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Author Info
Roques, F.A.
Nuttall, W.J.
Newbery, D.M.
de Neufville, R.

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Abstract

High fossil fuel prices have rekindled interest in nuclear power. This paper identifies specific nuclear characteristics making it unattractive to merchant generators in liberalised electricity markets, and argues that non-fossil fuel technologies have an overlooked ‘option value’ given fuel and carbon price uncertainty. Stochastic optimisation estimates the company option value of keeping open the choice between nuclear and gas technologies. This option value decreases sharply as the correlation between electricity, gas, and carbon prices rises, casting doubt on whether private investors’ fuel-mix diversification incentives in electricity markets are aligned with the social value of a diverse fuel-mix.

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Publisher Info
Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0555.

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Length: 27
Date of creation: Nov 2005
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Handle: RePEc:cam:camdae:0555

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Related research
Keywords: Nuclear economics; stochastic optimisation; fuel-mix; diversification.;

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Find related papers by JEL classification:
C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Statistical Simulation Methods
C61 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Optimization Techniques; Programming Models; Dynamic Analysis
L52 - Industrial Organization - - Regulation and Industrial Policy - - - Industrial Policy; Sectoral Planning Methods
L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Frayer, Julia & Uludere, Nazli Z., 2001. "What Is It Worth? Application of Real Options Theory to the Valuation of Generation Assets," The Electricity Journal, Elsevier, vol. 14(8), pages 40-51, October. [Downloadable!] (restricted)
  2. Pindyck, Robert S., 1993. "Investments of uncertain cost," Journal of Financial Economics, Elsevier, vol. 34(1), pages 53-76, August. [Downloadable!] (restricted)
    Other versions:
  3. Richard K. Lester & Mark J. McCabe, 1993. "The Effect of Industrial Structure on Learning by Doing in Nuclear Power Plant Operation," RAND Journal of Economics, The RAND Corporation, vol. 24(3), pages 418-438, Autumn. [Downloadable!] (restricted)
  4. Gollier, Christian & Proult, David & Thais, Francoise & Walgenwitz, Gilles, 2005. "Choice of nuclear power investments under price uncertainty: Valuing modularity," Energy Economics, Elsevier, vol. 27(4), pages 667-685, July. [Downloadable!] (restricted)
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  5. Shimon Awerbuch & Raphael Sauter, 2005. "Exploiting the Oil-GDP Effect to Support Renewables Deployment," SPRU Electronic Working Paper Series 129, University of Sussex, SPRU - Science and Technology Policy Research. [Downloadable!]
    Other versions:
  6. Cox, John C. & Ross, Stephen A. & Rubinstein, Mark, 1979. "Option pricing: A simplified approach," Journal of Financial Economics, Elsevier, vol. 7(3), pages 229-263, September. [Downloadable!] (restricted)
  7. Li, Ying & Flynn, Peter C., 2004. "Deregulated power prices: comparison of volatility," Energy Policy, Elsevier, vol. 32(14), pages 1591-1601, September. [Downloadable!] (restricted)
  8. Bar-Ilan, Avner & Strange, William C, 1996. "Investment Lags," American Economic Review, American Economic Association, vol. 86(3), pages 610-22, June. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Frank Felder & Ruthanne Haut, 2008. "Balancing alternatives and avoiding false dichotomies to make informed U.S. electricity policy," Policy Sciences, Springer, vol. 41(2), pages 165-180, June. [Downloadable!] (restricted)
  2. Roques, F.A., 2007. "Technology Choices for New Entrants in Liberalised Markets: The Value of Operating Flexibility and Contractual Arrangements," Cambridge Working Papers in Economics 0759, Faculty of Economics, University of Cambridge. [Downloadable!]
    Other versions:
  3. Nuttall, W.J. & Taylor, S, 2008. "Financing the Nuclear Renaissance," Cambridge Working Papers in Economics 0829, Faculty of Economics, University of Cambridge. [Downloadable!]
  4. Finon, D. & Roques, F., 2008. "Financing arrangements and industrial organisation for new nuclear build in electricity markets," Cambridge Working Papers in Economics 0850, Faculty of Economics, University of Cambridge. [Downloadable!]
  5. Sandro Sapio, 2008. "Volatility-price relationships in power exchanges: A demand-supply analysis," LEM Papers Series 2008/07, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy. [Downloadable!]
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